City Government

Bloomberg and the Budget: A Story in Three Parts

Mayor Michael Bloomberg's eight-year city budget story can be broken into two chapters and an unfinished epilogue. In the first chapter, the mayor, having inherited economic and political circumstances beyond his control, masters fiscal turmoil by filling a nearly $8 billion budget gap with bold spending reductions and tax increases -- and puts the city back on a firm fiscal foundation.

In the second chapter, blessed with a robust economy and unanticipated new revenues, the mayor introduces new spending, including a major increase in capital spending. He also reduces taxes for high earners and property owners, and, not incidentally, expands his fiscal powers by building huge budget surpluses and creating a new reserve fund.

In the epilogue, the mayor in June 2009, facing a major recession and plunging tax revenues, patches together the 2010 budget, the last budget of his second term, filling yet another $8 billion budget gap with big expense and capital budget cuts, tapping into his reserve fund, and new tax increases.

The epilogue is unfinished, however as the patching fails to fill the cracks in the city's fiscal foundation. The story comes full circle as the June 2009 Bloomberg financial plan paints a fiscal future as gloomy as that of former Mayor Rudolph Giuliani's June 2001, last financial plan for fiscal years 2002-2005.

Who Wins, Who Loses?

The roller-coaster changes in the Bloomberg fiscal narrative make it hard to determine the overall impact of the eight years. Certainly, on the spending side, there has been a rapid increase in so-called non-discretionary areas: Medicaid, debt service, pensions and health insurance costs. Those mandated costs, coupled with two periods of agency downsizing and tax cuts during chapter two, have squeezed the budgets in essential city services.

On the tax side, the story is simpler. City tax burdens have shifted over the past eight years. The bold tax increases in the crisis of chapter one were not only ambitious, they were equitable, raising not personal income tax rates in a progressive way and increasing average property tax rates by 18.5 percent after a decade of frozen average rates.

But during chapter two and the epilogue, the tax system seems to be more about politics than policy. Progressive income tax increases were phased out and property taxes were cut back -- then raised again. And the last patch job -- the June 2009 financial plan -- was a 12.5 percent increase in the city’s most regressive tax, the sales tax, while the personal income tax remained at historically low levels.

In addition, the mayor never addressed the inequities and bizarre complexities of the city's property tax system, the city's biggest tax source. The current system plays favorites, giving preference to especially homeowners over renters, who pay a portion of their landlord’s tax, in spite of the fact that renters represent two thirds of New Yorkers.

Chapter One: Fiscal Crisis

When he took office, Bloomberg inherited a host of economic and fiscal crises: an unbalanced financial plan and a national recession that began in 2001 and deepened with the local economic consequences of the Sept. 11, 2001 terrorist attack. Former Mayor Rudy Giuliani's last financial plan, adopted in June 2001, had projected $2.8 billion and $2.6 billion deficits for fiscal 2003 and 2004, respectively. The New York State Financial Control Board warned in July 2001, "The city's fiscal fortunes are about to enter a period of turbulence."

Turbulence indeed. Bloomberg and the City Council, in June 2002, balanced his first budget, with the help of $1.5 billion in state-approved borrowing, but by November 2002, prospects for the 2003 budget were dark, and the projected 2004 budget deficit ultimately reached nearly $8 billion.

Here began the mayor's finest fiscal hour. Not only did he begin a series of agency budget reductions, but in a matter of weeks he convinced the City Council to agree to an 18.5 percent increase in the city's property tax rate, as of January 2003, a bold political move given that the average rate had been frozen for 10 years.

The second major step was the mayor's larger gap-reduction strategy in the fiscal 2004 budget. Again, in addition to big expense cuts, the mayor and council agreed on two new and temporary personal income tax rates for higher income households (4.25 percent for singles earning over $100,000 and 4.45 percent for those with incomes over $500,000) and a temporary (two years) sales tax rate increase (0.125 percent).

Thus the mayor resolved the fiscal crisis with a balanced use of new tax revenues and agency reductions. The tax burden was spread equitably, the bulk of it falling on commercial and residential property owners and higher-income households.

Chapter Two: The Boom Years

Once the fiscal 2003 and 2004 budget crisis was resolved, the city benefited from a robust economy and the new tax revenues that poured in. City-funded spending increased rapidly, as spelled out in the July report of the state deputy comptroller for New York City, averaging nearly 10 percent in fiscal 2004 and 2005 and 8.6 percent during 2006 and 2007.

But the spending had a unique pattern. It included the crafting of huge annual budget surpluses, the creation of a new reserve fund, the use of surpluses to pre-pay future expenses and substantial salary increases for city workers. Uniformed workers, for example, got annual increases of 4.5 percent and 5.0 percent in 2005 and 2006, and 4.0 percent annually from 2007 to 2010. As long as the surpluses continued, the surplus rollovers made budgeting for the next year rather easy.

The scale of these surpluses was impressive. According to the state deputy comptroller, revenues exceeded expenditures by $3.3 billion in fiscal 2005, $6 billion in 2006, $6.6 billion in 2007 and $4.1 billion in 2008. But the high rate of city-funded spending in that period masks the fact that relatively little of the growth went into new services.

Most of the growth was in so-called non-discretionary and employee fringe benefits (pensions and health insurance costs primarily) or went to pre-pay expenses. During 2006 and 2007, for instance, the city contributed $2.5 billion to its new reserve fund, the Retiree Health Benefits Trust. In 2007, it retired $1.3 billion in outstanding debt due in fiscal years 2009 and 2010. Excluding those discretionary trust-fund contributions and the pre-paid debt, city-funded spending would have grown more slowly, 2.5 percent in fiscal 2006 and 7.4 percent in 2007.

In what would turn out to be the last year of the economic and budget good times, city-funded expenditures increased by 5.1 percent in 2008 -- including another big pre-payment, of $2 billion in debt service otherwise due in 2010. During this period the mayor started reducing his earlier property tax increase, introducing in fiscal 2005 an annual $400 property tax rebate for residential owners and in fiscal 2008 a 7 percent reduction in the property tax rate.

The other big budget initiative during these years was in the capital budget. A 10-year capital plan that totaled $49.3 billion in fiscal 2004 increased to $83.7 billion in fiscal 2008, according to the July financial control board report. The city made capital commitments of $12 billion in 2008 and $13 billion in 2009.

Epilogue

The mayor recognized halfway through the 2008 fiscal year that the economy was slowing, tax revenues were about to fall, and several years of city budget surpluses were about to end. So in the January 2008 financial plan modification, the mayor began a series of agency reductions and new taxes that continues to play out in the current 2010-2013 financial plan. Total gap-filling actions for fiscal 2010 alone total $8.4 billion, according to the state deputy comptroller.

The same report notes the result: Spending over fiscal 2009 and 2010 is projected to decline by 2.8 percent. The 10-year capital budget plan was cut back by $22 billion, or 27 percent.

So what has been the cumulative effect of several years of discretionary spending increases, tax shifts, rollovers of budgetsurpluses, steady increases in non-discretionary areas and recent discretionary cuts? There are at least four different ways of answering the question.

Conservative or Expedient

One views the Bloomberg administration as doing the prudent thing: preparing for a rainy day, keeping discretionary spending down, paying future bills early, putting money in a reserve fund for future retiree health costs, keeping taxes lower than they had been -- in other words, fulfilling a solid conservative agenda.

But another way of looking at these years sees short-range budget-patching trumping long-range planning and politics winning out over policy. In this view, the focus should be on the fact that Bloomberg's June 2009 long-term financial plan is structurally unbalanced. The financial control board says future deficits could reach $6.3 billion in 2012 and $7.1 billion in 2013.

One reason is that the budget surpluses have finally run out. The state deputy comptroller points out that some $6.6 billion of the current $60 billion 2010 budget is composed of "nonrecurring revenues," often called "one-shots," a no-no for fiscal conservatives. Some $5.7 billion of those one-shots in 2010 represent the pre-payments from earlier surpluses.

As a result of using one-shots like the surpluses, budgeting for next year -- fiscal year 2011 -- starts with a $6.6 billion hole to be filled. In fact, the prospects for the 2010-2013 financial plan look worse than for Giuliani’s last financial plan, in June 2001.

The state financial control board in 2001 projected that Giuliani's plan would leave as much as a $3.6 billion budget hole for the next mayor’s first full-year budget -- an amount equal to 8.3 percent of the projected $43 billion 2003 budget. Bloomberg learned how prescient the board was a little more than a year later when the November 2002 fiscal crisis erupted.

In this view, we have come full circle. The June Bloomberg financial plan for 2010-2013 projects a budget gap for fiscal 2011 (the next administration’s first full-year budget) that the financial control board says could be as high as $6.2 billion, or 9.2 percent of a projected $67 billion budget.

Missed Opportunities?

A third view of the Bloomberg record posits that using budget surpluses as rollovers and parking money in a reserve fund meant missing a chance to improve essential services.

Discretionary spending ihas become a much smaller part of the total budget. The deputy state comptroller notes, for instance, that non-discretionary spending is projected to represent 54.2 percent of city-fund revenues by fiscal 2013, up from 39.9 percent in fiscal 2002.

Since the January 2008 gap-filling began, agencies have seen their funding squeezed. The total cuts reduced 2010 spending by over $3 billion. The most severe of these reductions came in June’s adopted financial plan. They will average about $2.1 billion each year from 2010 through 2013. Nearly $1.2 billion of those annual cuts -- or 62 percent -- will come out of five major service agencies: public education, police, fire, social services and children’s services. Nearly $700 million a year, 34 percent of the cuts, will come from education alone.

The mayor's strategy of service cuts the past two years has generally called for across-the-board reductions: no priorities, no exceptions for any service, such as education, seniors or children services. On the tax front, however, the changes have been more selective, adding a new burden for the average New Yorker while protecting higher income residents.

For instance, the $2.4 billion in new taxes in the 2010 budget have two major parts. About $1.5 billion comes from eliminating the 7 percent property tax cut in January 2009 and the $400 property tax rebate for homeowners as of July 2009. The beneficiaries of those cuts will then pay the same rates that went into effect in January 2003.

On the other hand, the big city sales tax rate increase (from 4.0 to 4.5 percent) and repealing the sales tax exemption for clothing over $110 together add over $600 million in new revenues, but use the most regressive tax available, inequitably burdening lower-income New Yorkers.

At the same time, the top rate of the city's mildly progressive personal income tax remains at 3.65 percent, well below the 4.45 percent top rate used to help resolve the fiscal 2003 and 2004 crisis, as well as a similar crisis in the early 1990s. The mayor has claimed that restoring the higher income tax rates for higher earners could be counterproductive, forcing the richest New Yorkers to leave the city.

Expanding Mayoral Power

A fourth reading of the Bloomberg budget narrative would challenge the mayor's increased power over fiscal matters. New York City mayors have enormous power over city budgets under the city charter. The City Council does formally approve each executive budget and the mid-year modifications but rarely challenges the mayor. The council restored or added only $364 million to the $60 billion budget adopted in June -- less than 1 percent.

Mayors of New York have always had this power but Bloomberg has taken it further. For one, he made major changes in mid-year modifications, which are normally uneventful, technical updates. The November 2002 and January 2008 financial plans were pushed through in a matter of weeks; the City Council -- and the public -- had little chance to comment on either modification. Bold actions, yes, but they short-circuited thedemocratic give-and-take of the January-June budget process.

The most controversial example of enhanced mayoral power is the creation of the Retiree Health Benefits Trust fund in fiscal 2006. That fundwas sold as a set-aside for the city’s growing liability for health benefits for retired city workers. Liability will reach nearly $100 billion by fiscal 2013, according to the financial control board's July 2009 report.

The board in another report, little more than two years ago, said, "The trust fund money, once committed, will only be used to pay the costs of healthcare benefits in future years and will not be used for any other purpose."

Well, the board got that wrong. The June financial plan for 2010-2013 draws down $1.1 billion of the fund's $2.5 billion to help fill the big deficits ahead. The board in its most recent report calls this, "a significant step back" in addressing the healthcare liability. The city comptroller's July report calls the drawdown "unfortunate." The deputy state comptroller adds that it "shifts the burden to future taxpayers."

Bloomberg deserves credit for balancing eight budgets, two of them under very difficult circumstances. But any judgment about the substance of the budgets themselves must note the city's uncertain fiscal future, the expansion of mayoral discretionary power, and the lack of any sustained and substantial budget policy priority, either on the spending or the tax side.

Glenn Pasanen, who teaches political science at Lehman College, has been in charge of Gotham Gazette's finance topic page since 2001.

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